9. Effect of discrimination on the market price Consider the market for rickshaw
ID: 1162466 • Letter: 9
Question
9. Effect of discrimination on the market price Consider the market for rickshaw rides, which you can assume is a competitive market. Suppose some rickshaw companies are discriminatory and hire only American citizens to drive their rickshaws, while other firms are nondiscriminatory-they don't care about the citizenship of the drivers they hire as long as they have a legal right to work in the United States. Assume for now that customers are nondiscriminatory-when they decide to take a rickshaw, they don't care about the citizenship status of the driver The marginal cost (MC), average variable cost (AVC), and average total cost (ATC) curves of the two types of firms are shown on the following graphs Figure A shows the cost structure of a discriminatory firm; Figure B shows the cost structure of a nondiscriminatory firm. Because nondiscriminatory firms are able to hire from a larger pool of potential workers, they are able to provide the same services at a lower cost. Figure A: Discriminatory Firm Figure B: Nondiscriminatory Firm 100 90 80 100 80 ? 70 o 60 ? 70 60 D 50 ?40 40 30 20 10 AVC MC 20 AVC 10 0 4 12 16 20 24 28 32 36 40 0 4 8 2 16 20 24 28 32 36 40 DISTANCE (Hundreds of miles) DISTANCE (Hundreds of miles)Explanation / Answer
The market is a competitive market so P = MR = AR
The firms wll produce where P = MC, to maximize their profit.
PRICE is given as $0.5 mans 50 cents.
It means in the short run,
Discriminating firm - will produce where MC = P = 50 cents, which corresponds to the level of 18 units of ouput and at this level of ouput the AVC is 32 cents (32 < 50). So the firm will operate in the short run because P> AVC, it means that firm is able to cover its variable cost so it will reamin or operate in the short run.
Also the firm ( discriminatory firm ) will bear loss in the short run because ATC at this level of ouput is 60 cents which is greater than the price (60>50) or P > ATC so the firm will bear losses.
In the long run, the firm will exit the market, because P < ATC, it means firm i not able to cover its cost and will exit the market.
NON- discriminatory firm : Will produce 18 units at the level of price 50 cents because at this level P = MC = 50 cents.
THe firm will earn a profit in the short run, because ATC at this level is 35 cents which is less than 50 cents ( price).
Also as the AVC at this level of ouptut is 20 cents the firm will continue to operate in the short run because P > AVC .
In the long run, The non- discriminating firm will stay the market, because P = 50 cents is greater than ATC of the non - discriminating firm, it means firms is able to cover its cost, it will continue to stay in the market till the Price = 35 cents. After the price fall below than 35 cents, this firm will exit the market in the long - run.
Suppose the discriminatory firm......
Correct ans is Both Firm may co-exist in the market, and they will each earn zero profit.
Explaination :
It is so because even now the half of the population does not care about the citizenship of the richshaw driver and also the people who donot care about the citizenship of the rickshaw driver will prefer the non - discriminating firm because of lower prices it could charge as its cost is less, whereas the people who prefer to take rickshaw only when the driver is American, they have to pay high price ( because of high cost of the firm). It means the effect is not strong whic could lead to eliminate any firm.
True or False :
Ans is True : because those people who will only take rickshaw if the driver is American paying a premium ( as the price of discriminatory firm is higher than the non - discriminating firm ). So on this basis, we can expect discrimination to a country club that offers exclusive membership to people of a certain nationality because its members are willing to pay more for such a exclusive club.
Short Run Long Run Types of firms Profit or loss Operate? Stay or exit Discriminatory firm Loss Yes Exit the market Non - discriminatory Positive profit No Stay in business.Related Questions
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